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Housing, Household Tenure Choice, and the Locations We Choose A Home for Everyone Conference 2014 Presented by: Mark J. Eppli Interim Keyes Dean and Bell Chair in Real Estate Marquette University July 16, 2014 Slide 2 GDP and Jobs Slide 3 The U.S. has maintained historically weak GDP growth in the 2000s at 1.83%, versus 3.25% for the period 1980- 2000.... Source: Federal Reserve of St. Louis. Slide 4 .... which bring us to jobs.... Source: St. Louis Federal Reserve. Slide 5 .... however, the unemployment rate is not the whole story, labor force participation rates are a concern.... Source: St. Louis Federal Reserve Slide 6 .... and the U.S. labor force participation rate declines are in the young adult cohorts.... Source: Vanguards Economic and Investment Outlook, January 2014, 16. Slide 7 .... unemployment is not an equally distributed.... Source: St. Louis Federal Reserve Slide 8 GDP and employment take-aways: U.S. GDP growth is slowly growing; Unemployment rate declines overstate the health of the jobs market; Much labor force slack exists; High school graduates struggle to find family- supporting job; and Without solid job growth there will not be household growth Slide 9 Wealth and Income Slide 10 Net worth is back. Home prices were up 13.6% in 2013 and stocks had their best year since 1997 with a 31.9% total return increasing household wealth.... Source: WSJ, December 10, 2013, A2. Slide 11 .... however the net worth of U.S. families is highly concentrated.... Source: Marty Hart-Landsberg, Lewis and Clark University. Slide 12 .... Net worth of the bottom portion of the wealth spectrum is heavily house- wealth dependent and 18.8% of houses are underwater... Source: Pew Research Center. Slide 13 .... 39% of households have less than $25,000 in net worth.... Slide 14 .... making a 20% house down payment is unreachable for 39% of households.... Source: National Association of Realtors Slide 15 ....which limits existing home sales.... Source: National Association of Realtors Slide 16 Source: Lawrence Mishel, Economic Policy Institute, April 26, 2012..... real compensation has been stagnant since 1973, making debt service payments more difficult.... Slide 17 Wealth and income take-aways: Net worth of U.S. households now exceeds 2007 in real and nominal terms; 28% of the U.S. net worth is held by the bottom 90% of the population; 39% of households have a net worth of less than $25,000; Real compensation has stagnated; Which limits housing sales and house price growth. Slide 18 Interest Rates and Inflation Slide 19 Mortgage interest rates remain low.... Source: St. Louis Federal Reserve Slide 20 .... due to low inflation in the U.S. Over the past 20 years inflation averaged 1.88%..... Source: Federal Reserve of St. Louis. Slide 21 .... with ample labor, unit labor costs are well- behaved.... Source: Federal Reserve of St. Louis. Slide 22 .... and commodity prices are relatively stable.... Source: Federal Reserve of St. Louis. Slide 23 .... longer-term interest rate should remain range bound in the +/-2.54% 10-UST rate given the generally slack labor markets and continued productivity that generate low global and U.S. inflation. Slide 24 Mortgage Underwriting Slide 25 Underwriting standards have not eased.... Source: Wall Street Journal, March 22, 2014. Slide 26 .... a closer look at recent tightening of underwriting standards.... Source: Wall Street Journal, June 9, 2014. Slide 27 .... more evidence of tight lending markets.... Source: Federal Reserve of St. Louis. Slide 28 .... which ultimately limits new entrants to the market.... Slide 29 Source: Research by Shilling and Hendershott, Washington Post, March 22, 2014..... with the lock-in effect limiting new home sellers willing to list their homes for sale.... Household mobility falls by 7.5 percent for every percent increase in interest rates. Slide 30 .... however, household debt service as a percent of disposable income remains very low.... Source: Federal Reserve of St. Louis. Slide 31 Mortgage underwriting take aways: Mortgage underwriting standards tightened in 2007- 2010; Underwriting standards have not eased much since; Limiting new entrants to the housing market. Slide 32 Single-Family Housing Market Fundamentals Slide 33 Home prices are at pre-bubble levels.... Slide 34 Source: Federal Reserve of St. Louis..... with the excess supply of homes absorbed.... Slide 35 .... and a dearth of new single-family housing coming to the market.... Source: Federal Reserve of St. Louis. Slide 36 .... homeownership rates have fallen back to pre-bubble levels as well.... Source: Federal Reserve of St. Louis. Slide 37 .... household formation has significant pent up demand.... Source: Joint Center for Housing Studies, State of the Nations Housing: 2013. Slide 38 .... minorities and seniors will drive most all household demand growth in the coming decade.... Source: Joint Center for Housing Studies, State of the Nations Housing: 2013. Slide 39 Slide 40 .... married couple households have declined dramatically over time.... Source: Census and Marquette University. Slide 41 .... the supply of mu ltifamily starts averaged 360,000 since 1956, a level we are now reaching replacement equilibrium rates.... Source: Federal Reserve of St. Louis. Slide 42 Housing market fundamentals take-aways: Prices are at pre-bubble levels; Market supply and demand are in equilibrium; Pent up demand exists for new households; However, new household formation skews toward rental housing. Slide 43 Challenges of the First-time Homebuyer Slide 44 Employment growth for the first-time homebuyers lags.... Source: St. Louis Federal Reserve Slide 45 ....unemployment rates for high school graduates remaining high.... Source: St. Louis Federal Reserve Slide 46 Source: Wall Street Journal, June 14, 2014.... and the average college graduate with the average student loan debt is straddled with $366 per month (assumes a 6% rate, 10 year term) Slide 47 .... many high school and college graduates living at with their parents.... Slide 48 .... and marriage is coming later in life.... Source: U.S. Census. Slide 49 .... which leaves the housing market prospects for the first-time homebuyer challenged.... Source: WSJ May 24-25, 2014, p. A2. Slide 50 First-time homebuyer take-aways: Employment growth for the 25-34 age cohorts has been non-existent; The high school graduate continues to struggle with employment and real wage growth; College graduates face of growing student loan payments; Leaving the first-time homebuyer market tenuous. Slide 51 The owner-occupied market has both headwinds/tailwinds: Headwinds Owning a home may no longer be the American Dream; GDP growth and labor force participation rate concerns remain; Stagnant wealth and income levels for most; Tighter underwriting higher FICO scores; First-time homebuyers remain challenged; Increasing house prices Tailwinds Single-family market fundamentals are solid Markets are at pre-bubble levels Markets are in equilibrium Mortgage interest rate remain low Slide 52 Housing, Household Tenure Choice, and the Locations We Choose A Home for Everyone Conference 2014 Presented by: Mark J. Eppli Interim Keyes Dean and Bell Chair in Real Estate Marquette University July 16, 2014